Genuine Parts Company — Q2 2011 Form 10-Q
Business context and period: The filing covers the quarter and six months ended June 30, 2011. Genuine Parts distributes automotive and industrial replacement parts, office products, and electrical/electronic materials, operating across the U.S., Canada, Mexico, and Puerto Rico.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $3,185 million | $2,847 million | $6,159 million | $5,449 million |
| Gross profit | $916 million | $822 million | $1,765 million | $1,583 million |
| Operating profit | $265 million | $224 million | $476 million | $405 million |
| Net income | $152 million | $124 million | $278 million | $225 million |
| Diluted EPS | $0.96 | $0.78 | $1.76 | $1.42 |
| Operating margin | 8.3% | 7.9% | 7.7% | 7.4% |
Q2 sales rose 12%, net income 22%, and diluted EPS 23% year over year. For the six months, sales grew 13%, net income 24%, and diluted EPS 24%. Gross margin was approximately 28.8% in Q2 versus 28.9%; for the first half it was 28.7% versus 29.0%. Management attributed the modest gross-margin pressure to competitive pricing and changes in customer and product mix. Operating expenses fell to 21.2% of sales in Q2 from 21.8%, and to 21.6% for the half from 22.4%, reflecting cost savings and sales leverage.
Cash flow and liquidity: First-half operating cash flow was $250 million, down from $352 million, as changes in operating assets and liabilities used $75 million versus providing $80 million in the prior-year period. Investing cash outflow was $80 million, including $42 million of capital spending and approximately $38 million for acquisitions. Financing cash outflow was $188 million, including $136 million of dividends and $55 million of share repurchases. Cash ended June at $517 million, compared with $530 million at year-end 2010. Current assets were $4.63 billion and current liabilities $2.11 billion; the current ratio was 2.2 to 1.
Debt: Total fixed-rate debt was $500 million, unchanged from year-end, with $250 million classified as current and debt maturities in November 2011 and November 2013. A May 2011 agreement provides for funding $250 million of notes maturing in November 2011; the replacement notes would mature in 2016 at 3.35%. No borrowings were outstanding on the $350 million revolving credit facility, which matures in December 2012.
Segments, changes, and management commentary
- Automotive: Q2 sales increased 9%; operating profit rose 10%. Currency contributed about 1% to sales growth; management cited sales initiatives and improving economic conditions.
- Industrial: Q2 sales increased 19% and operating profit 42%. Acquisitions contributed about 2% to Q2 sales growth and currency about 1%; internal sales initiatives and improving industrial indicators also supported results.
- Office products: Q2 sales increased 4% and operating profit 3%, but operating margin declined to 7.5% from 7.6%. Management cited soft market conditions and a slower economic recovery.
- Electrical/electronic materials: Q2 sales increased 28% and operating profit 32%. Acquisitions contributed about 10% to sales growth and higher copper prices about 5%.
Two Industrial Group acquisitions were completed in the first half for approximately $38 million; about $19 million of goodwill and intangible assets was recorded. Purchase-price allocations remain preliminary. The effective tax rate was 37.2% in Q2 versus 38.0%, and 35.8% for the first half versus 38.0%, helped by a favorable retirement-asset valuation adjustment and the expiration of the statute of limitations on certain international taxes. The company repurchased 1.2 million shares during Q2 for an average $51.98 per share; approximately 14.9 million shares remained authorized for repurchase.
Outlook, risks, and contingencies
No quantitative earnings or sales guidance was provided. Management said cash from operations and existing credit lines were expected to fund anticipated operations, including share repurchases, for the foreseeable future. Its stated priorities included expanding product lines and markets, pursuing acquisitions, and gross-margin and cost-saving initiatives.
Risks cited include weaker demand or macroeconomic conditions, inflation or deflation and energy costs, uncertain credit markets, vendor disruptions or unfavorable arrangements, competition and pricing pressure, execution of business initiatives, and litigation. Foreign-currency exposure, particularly the Canadian dollar, positively affected reported results in the period. The company guaranteed approximately $204 million of borrowings for independent automotive stores and affiliates; it reported covenant compliance and no significant historical guarantee losses. Interim results rely on estimates, including inventory, bad debts, and volume incentives, which may change at year-end. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the planned refinancing of the $250 million November 2011 maturity was funded and on the stated 3.35% terms.
- Whether first-half working-capital cash use persists, and how receivables growth and inventory management affect cash conversion.
- Whether sales growth and margin gains continue, especially given gross-margin pressure and ongoing weakness in Office Products.
- How preliminary acquisition valuations, integration, and future acquisitions affect results and goodwill.
- Potential exposure from the $204 million of guaranteed borrowings, including collateral recovery and covenant compliance.
- The sustainability of favorable tax adjustments and foreign-currency contributions, and the impact of year-end inventory and other estimate adjustments.